In a significant yet familiar move, Nigeria’s Securities and Exchange Commission (SEC) has announced a new framework aimed at regulating the burgeoning virtual assets market.

The establishment of a local office in Nigeria is now part of the eligibility requirements for Virtual Assets Service Providers (VASPs) under the SEC’s Accelerated Regulatory Incubation Programme (ARIP).

This is not the first time the SEC has attempted to regulate digital assets in Nigeria. Previous efforts have often faltered, with frameworks either being delayed or ultimately not implemented. The current initiative, outlined in a circular dated June 21, 2024, appears to follow a similar path, reflecting ongoing regulatory challenges and the government’s cautious stance toward digital assets, especially cryptocurrencies.

The new framework mandates that all operating and prospective VASPs, including crypto brokers and dealers, must visit the SEC ePortal to complete their application process within 30 days of the circular’s date. While the SEC is in the process of amending rules related to Digital Assets Issuance, Offering Platforms, Exchange, and Custody, it requires VASPs to comply with the ARIP in the meantime.

The primary objective of the ARIP is to expedite the onboarding process for entities whose applications are pending with the SEC and to attract potential applicants seeking registration. The program is designed to grant “qualified entities” provisional approval from the Commission until the comprehensive Digital Assets Rules become effective.

The framework targets VASPs and token issuers operating in Nigeria or offering services to Nigerian consumers. This includes platforms facilitating the offering, trading, exchange, custody, and transfer of virtual or digital assets.

Eligibility and Compliance Requirements

To qualify for ARIP, entities must be incorporated and have an office in Nigeria, with the Chief Executive Officer or Managing Director (or equivalent) residing in the country. They must also be engaged in investments and securities business, and either seeking registration or having pending virtual asset-related applications with the SEC.

Applicants are required to submit a sworn undertaking confirming that neither the owner nor the firm has been convicted of fraud or dishonesty within or outside Nigeria. They must also present an operational plan and business model with a clear value proposition or contribution to the capital market’s development, and demonstrate adequate provisions for investor and public interest protection.

The processing fee for ARIP is set at N2 million, and applicants must provide evidence of the required shareholder funds.

Reporting and Monitoring Obligations

ARIP participants are required to submit weekly and monthly trading statistics, quarterly financial statements, and compliance reports. They must also report on key issues such as misconduct, fraud, and operational incidents, along with measures taken to address these issues.

Additionally, participants are subject to the SEC’s onsite and offsite inspections, audits, and monitoring, and must provide periodic reports and returns as specified by the Commission.

Penalties for Non-Compliance

The ARIP framework outlines stringent penalties for non-compliance. Participants who fail to meet the requirements face an initial penalty of at least N5,000,000, with an additional N200,000 for each day of default.

Unauthorized or unregistered VASPs operating trading, offering, and custody platforms are subject to penalties starting at N20,000,000. Other digital investment platforms, including crypto brokers, dealers, advisers, and market makers, face penalties of at least N10,000,000 for operating without due authorization or registration.

Entities that do not comply with the SEC’s rules and regulations may also face suspension from capital market activities.

The Regulatory Framework Comes with Skepticism

Despite the SEC’s efforts, there is skepticism about the effective implementation of this regulatory framework. Past initiatives to regulate digital assets in Nigeria have often stalled, reflecting broader governmental hesitance toward cryptocurrencies. The current administration has frequently accused cryptocurrencies of contributing to the naira’s poor performance in the foreign exchange market, casting further doubt on the long-term viability of these regulatory efforts.

The federal government has consistently blamed cryptocurrencies for the naira’s depreciation in the FX market, attributing significant economic challenges to the unregulated nature of digital currencies. This latest regulatory push by the SEC seems to align with the government’s broader aim to control and monitor digital assets more strictly.

The tightening of digital regulatory frameworks comes on the heels of accusations from SEC Director Abdulkadir Abbas, who told the Federal High Court in Abuja that unregistered cryptocurrency exchange platform Binance Limited used its Naira peer-to-peer (P2P) virtual feature to devalue the Nigerian currency.

Construction workers build platforms. Those platforms can serve bricklayers, carpenters, painters and anyone working in the project. In internet business,  great companies engineer products with duality: products which are also platforms. Facebook is a product and also a platform.

In this piece, I explain why you must desire to create a platform and not just a product. Just like construction platforms, platforms enable you to rewire your business logic with ease. Products are hard-wired and fixed. Platforms create digital customers while products make consumers; customers are better. Out of customers, you have fans!

The best modern technology businesses are platform-anchored, not product-driven. Facebook is a platform. Apple has a platform. Google runs as a platform. These are among the most valuable companies on earth. As marginal cost goes lower in the internet age, platforms will rise because of the positive continuum of network effects. From aggregation construct to one oasis strategy, businesses with consumer focused frameworks are wired to succeed if they are platform-oriented.

In this piece, I explain the key components of the duality element.

Product applications are wired with predefined logic which means they do only what you want them to do and nothing more. Myspace built a social connection app and nothing more. But in platforms, you do not have “hard-wired” logic states making it easier to reconfigure the ecosystems for different uses. Here, Facebook engineered a platform which makes it possible that it can do whatever comes in future. Once that happens, you see amazing scalability driven by network effects: a virtuoso circle where as more people use a digital product, the product gets more data which is used to improve the customer experience, and that improved quality attracts more users.

Any digital product that does not have the duality element will struggle especially in consumer market: you need the product and the platform as one to make progress these days. You need to build platforms because they have the elasticity to evolve with your business logic. Products are static and fade quickly as markets change. Platforms can grow without bounds, anchoring new opportunities on top. The business logic of integration, process and decision making are best handled on platforms over products in the internet space. With platforms, you have CUSTOMERS; products deliver consumers.

In the ever-evolving landscape of global finance, blockchain technology, particularly cryptocurrencies like Bitcoin, has been touted as a potential hedge against geopolitical uncertainty. This perspective has gained traction among investors and financial institutions alike, as they navigate the complexities of international relations and market dynamics.

The concept of using blockchain as a hedge stem from its decentralized nature, which theoretically insulates it from the whims of centralized authorities and the impact of geopolitical tensions. Cryptocurrencies operate on a peer-to-peer network, ostensibly reducing reliance on traditional financial systems that can be vulnerable to political strife and economic sanctions.

BlackRock, the world’s largest asset manager, has recently highlighted Bitcoin’s role in this context. Jay Jacobs, Head of Thematic and Active ETFs at BlackRock, remarked that Bitcoin is considered by many investors as a hedge against geopolitical and monetary risks. The digital assets industry, according to Jacobs, is experiencing significant growth, with investors showing a keen interest in products like BlackRock’s IBIT ETF since its launch.

However, it’s crucial to approach this narrative with a degree of skepticism. Bitcoin and other cryptocurrencies are still nascent assets with a fraction of the market size of traditional safe-havens like gold. This smaller market size contributes to higher volatility, which can be a double-edged sword. While it may offer substantial returns, it also poses significant risks, especially in the face of geopolitical upheavals.

Moreover, the empirical literature suggests that geopolitical uncertainty does have an impact on cryptocurrency markets. A study published in SN Business & Economics indicates that the Geopolitical Risk Index (GPR) is a powerful predictor of Bitcoin returns and volatility. This finding underscores the potential of cryptocurrencies to serve as diversifying or hedging instruments in investment portfolios.

On the flip side, the use of blockchain and cryptocurrencies can also present risks. For instance, countries under economic sanctions, like Russia, could potentially leverage decentralized technologies to circumvent these restrictions, as noted in a Springer article. This raises ethical and legal questions about the role of blockchain in global finance.

Furthermore, policy uncertainty can affect the volatility of Bitcoin, suggesting that while it may have hedge properties, it is not immune to the effects of regulatory changes and political developments.

While blockchain and cryptocurrencies offer an intriguing proposition as a hedge against geopolitical uncertainty, they are not without risks. Investors must weigh the potential rewards against the volatility and ethical considerations. As with any investment, a measured and informed approach is essential to navigate the uncertain waters of geopolitics and finance. The future of blockchain as a geopolitical hedge remains to be seen, but it undoubtedly presents a fascinating intersection of technology and global economics.

Investing in cryptocurrencies can offer high returns, but it’s essential for investors to understand and accept the risks involved. A balanced approach, with a clear understanding of the volatile nature of the market and the risks outlined, is crucial for anyone considering adding cryptocurrencies to their investment portfolio. Remember, never invest more than you can afford to lose and always do your due diligence.